FHA

If you've been looking forward to taking advantage of a government-backed mortgage through the Federal Housing Administration - and have bad credit - you may have a harder time getting financed. The agency announced on Wednesday its plans to make adjustments that will help strengthen its weakening finances, unfortunately, at the expense of bad-credit borrowers.

Federal Housing Administration Adjustments

According to recent reports, the Federal Housing Administration (FHA), which insured nearly a third of the new mortgages in 2009, will make several adjustments to its lending process in 2010, including:

• Increasing premiums: The FHA plans to increase the premium it charges for its mortgage insurance (which backs those who can't afford to pay 20 percent of the loan as their down payment).
• Larger down payments: Those who have weaker credit scores will be required to come up with larger down payments for their homes.
• Reduced seller contributions: Many times, a seller can contribution to a buyer's closing costs; however, the FHA plans to reduce the amount the seller can provide and require lenders to enforce this reduction.

Unfortunately, the FHA has suffered a lot of losses in the past year due to a growing number of defaults. As a result, it has decided to make the changes necessary to bring its reserve fund back above 2 percent of its insurance guarantees, which is mandated by Congress (currently, FHA's fund sits at 0.53 percent).

What the Changes Mean to Underserved Communities

The FHA predicts that its adjustments won't hurt borrowers much. In fact, the increase in mortgage insurance premiums is predicted to increase by around 0.5 percent. However, the credit score adjustments could have an effect on a lot of borrowers.

From now on, borrowers will be required to have a credit score of at least 580 to qualify for the 3.5% down payment program. Those with lower scores will have to pay at least 10 percent.

Unfortunately, many borrowers gave lower credit scores due to foreclosures, bankruptcies and other issues related to losing their jobs during the financial crisis. However, the FHA argues that the average credit score is still in the upper 600s.

If you were buying a home, could these FHA adjustments affect you?

Wouldn't it be great if there was a government agency to help stabilize the mortgage market, regulate housing standards and conditions and enable United States residents a home financing system through insurance of mortgage loans? There is and it is called the Federal Housing Administration.

History of the FHA

The Federal Housing Administration was formed in 1934 as part of the created as part of the National Housing Act. The act was in direct response to the Great Depression and the devastating affect it had on the housing market. During the depression, the banking system failed which had a direct correlation with the housing market. Many US citizens were unemployed and when the crash forced the lenders to collect on all due mortgages, the problem just got worse. The mortgage holders took ownership of all the foreclosed houses that were highly devalued and because of the financial freeze new loans werent issued and there were very few home sales.

To prevent this particular crisis from occurring again, the government created and passed the National Housing Act of 1934 and the agency minding it was the Federal Housing Administration. The main job of the Federal Housing Administration was both the terms of mortgages and the interest consumers could be charged. The overhaul of the existing system increased the ability for citizens to purchase homes and grew the market for single-family homes.

Loans with the FHA

Loans generated by the Federal Housing Administration are backed through a mix of a small upfront mortgage insurance premium (UFMIP) and a small monthly mortgage insurance premium. Homeowners using a Federal Housing Administration loan must pay monthly mortgage insurance for five years or until the loan is paid down to 78% of the appraised value.

What the FHA has done for citizens

Since its formation in 1934 and its 1965 shift to becoming an arm of HUD (Department of Housing and Urban Development), the Federal Housing Administration has insured over 35 million home mortgages. It is also important to note that until recently, the Federal Housing Administration was the only government agency that was solely self-funded and generated its own income.

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